Cracks have appeared in the Japanese yield curve control dam | Forexlive

There’s no direct talk of transitory but the BOJ’s forecasts have inflation falling back down in time.

“Due attention is required because the possibility that the persistence of price rises in Japan has been underestimated cannot be ruled out, as were the cases with Europe and the United States,” a comment said, highlighting the stakes.

And the stakes are particularly high for Japan because of its extreme debt load.

At this point, it’s wholly irresponsible not to back away from total yield curve control or zero rates. Policy can remain stimuluative without resorting to such extreme measures.

The market, though, has been lulled into the same sense of complacency. There was some yen buying on the headlines yesterday but it has completely reversed since and yen crosses remain near multi-month (and sometimes multi-year) highs.The next Bank of Japan meeting isn’t until July 28 but risk will be high and I’d expect yen strength for 3-4 days beforehand.

Moreover, don’t sleep on the risk to global bond markets if the BOJ pulls the plug. A shift in policy, or a return of real inflation would upend the entire global bond market.